Chapter 11: Public goods and common resources
We consume many goods without paying: parks, national defense, clean air & water.
When goods are free, the private market may fail to provide the socially efficient quantity
One of the Ten Principles from Chapter 1: Governments can sometimes improve market outcomes.
Excludable: when a person can be prevented from using the good (fish tacos vs. radio signals); you
cannot have any unless you buy it (only some people can use it)
A good is rival in consumption if one person’s use of it diminishes others’ use
Private goods are excludable and rival in consumption markets work best for these goods
Not a rival in consumption: you using it does not affect others’ use of it
Non-excludable; something of value has no price attached to it
- Private decisions about consumption & production can lead to inefficiency.
- Role of government: Public policy can raise economic well-being.
Difficult for private markets to provide because of the free-rider problem
- person who benefits from a good but avoids paying for it usually with non-excludable goods
- firms cannot prevent non-payers from consuming the good positive externality
- Result: not produced, even if buyers collectively value the good more than cost of providing it
- Role of government: if benefit>cost, government should provide it and pay for it with a tax on
those who benefit but measuring the benefit is usually difficult
Cost-benefit analysis: study that compares costs and benefits of providing a public good
imprecise, so the efficient provision of public goods is more difficult than that of private goods
- Cannot prevent free riders from using it
- Little incentive for firms to provide it
- Role of government is to see that these resources are provided
Problem: rival in consumption each person’s use reduces other’s ability to use
- Role of government: ensuring they are not overused
Important common resources
1. Clean air and water
2. Congested roads